Good Growth at Weight Watchers

I've been so depressed about the impossibility of finding a stock that might float the boats of my Motley Fool Hidden Gems colleagues that I took to eating ice cream sundaes. Now I'm fat; I have to go on a diet. Then it hit me: Perhaps Weight Watchers International (NYSE: WTW) is worth looking into.

The company operates internationally and has franchises as well, which is always nice because franchises have the potential to make good money for companies. Competition includes privately held Jenny Craig and NutriSystem (Nasdaq: NTRI) . The company has a strong brand name, built on its reputation as a recipe for success. And we'd do well to pay it heed, because this will keep customers coming while trends in dieting may come and go.

The recent stock price of $51.87 gives the company a price-to-earnings ratio of 27 based on analysts' current fiscal-year earnings estimates of $1.92; the forward P/E of 23 is based on 2006 estimated earnings of $2.23. One might say Weight Watchers needs to trim its price-to-earnings-to-growth number of 1.43 for it to be considered a value, when observing PEG based on growth between the current fiscal-year estimates and 2006 estimates. Then again, my eyes need adjusting, because when I looked at the number next to market cap, I could've sworn it said $2 billion and not $5.34 billion. Per my criteria:

Market cap of under $2.5 billion? Uh ... no.

Historical and projected annual earnings growth of 15%? It averaged 46% in each of the past five years, and it's estimated at 16% next year and 15% for the five years after that.

Is the market cap-to-free cash flow ratio less than the P/E? Nope, it comes in at around 30.

Is the market cap-to-free cash flow-to-five-year growth rate under 0.66? No way. It's at 2.

Is debt 20% of equity and reasonable? No, the debt-to-equity ratio comes in a little closer to 1.5.

Are net profit margins greater than 7%? They're fairly robust, at 18.4% on a trailing-12-months basis.

Is there insider ownership of 20% to 50%? Do you call 0.19% ownership?

So why did I lead you to think Weight Watchers might warrant Hidden Gems consideration? Because sometimes instead of a candidate, you find a growth vehicle. It may not be a small cap, but with these net margins, its return on equity, and the earnings growth, Weight Watchers' stock price may still have room to bulk up.

For disparate views on Weight Watchers, see:

Stephen Simpson's excellent article about the many problems for Weight Watchers.

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